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MoneyNet - Glossary of finances
Category: Economy and Finance
Date & country: 24/09/2007, UK
This is a fee charged by some lenders which is not refundable if the mortgage application does not proceed. The Administration fee will often form part of the valuation fee but will be retained by the lender even if the valuation has not been carried out.
This is a general term which encompasses arrears and county court judgements. It can also include major credit problems which have resulted in bankruptcy. For further information look at arrears, county court judgement and bankruptcy.
Funds placed with a bank or financial institution which may be invested at the bank or institution's discretion on the client's behalf.
AER - Annual Equivalent Rate
This illustrates what the interest rate would be if the interest was paid into the account and compounded each year. As every advert for savings products will contain an AER the consumer will be able to compare more easily the expected return from differing products.
A particular type of personal allowance relevant only to those aged 65 years and over. It allows a greater amount of income to be earned before tax liability for people over this age.
The settlement of a debt through the periodic repayment of principal and interest payments.
Annual Percentage Rate
This is meant to show the true cost of borrowing and adjusts the notional interest rate to take account of all the initial fees and ongoing costs to reflect the real cost of borrowing throughout the entire mortgage term.
(See Repayment Mortgage)
APR - Annual Percentage Rate
Introduced under the Consumer Credit Act 1974 as a means of comparing like with like ie. One loan with another or one credit card to another. It should be quoted whenever money is borrowed. The APR calculates the total interest to be paid over the whole term and includes any charges to be paid as well as the headline interest rate.
This is a fee charged by some lenders in order to access particular mortgage deals. Arrangement fees particularly apply if you are looking for a fixed rate or discounted rate mortgage and these may either be payable up front, added to the loan on completion, or deducted from the loan on completion (check with the chosen lender which one applies).
Contracted mortgage payment not made by the due date. Applicants who have arrears on a current mortgage may experience problems if attempting to arrange a new mortgage through the mainstream lenders. A number of lenders do, however, specialise in this area of the market and their details can be found in the arrears section of the moneynet site.
ATM - Automated Teller Machines
Commonly referred to as cash dispensers or hole in the wall machines. Enables the user to access their account for withdrawals (typically up to £250), get a balance, order statements or cheque books and sometimes pay bills or pay money in, 24 hours a day. There may be a charge if you use an ATM not supported by your own bank or user group.
Bank of England
UK's central bank responsible for the regulation of the banking industry, issuing of money and more recently the control of inflation, with the formation of the Monetary Policy Committee under the new Labour government.
Anyone can go bankrupt, including individual members of a partnership. There are different procedures for dealing with companies and for partnerships themselves. When a bankruptcy order has been made you must:
-provide the Official Receiver with a full list of your assets and details of what you owe and to whom;
-look after and then hand over your assets to the Official Receiver together with all your books, records, bank statements, insurance policies and other papers relating to your property and financial affairs
-tell your trustee about assets and increases in income you obtain during your bankruptcy. (Note: you are legally obliged to inform your trustee of any property which becomes yours during the bankruptcy. Such property includes lump sum cash payments that you may receive, for example redundancy payments or money left in a will);
-stop using your bank, building society, credit card and similar accounts straightaway
-not obtain credit of £250 or more from any person without first disclosing the fact that you are bankrupt.
-not make payments direct to your creditors. You may also have to go to court and explain why you are in debt. If you do not co-operate, you could be arrested.
The minimum rate at which banks are prepared to lend money, altered by the central bank's dealing rates with the discount houses. It forms the benchmark for all other interest rates.
Basic Rate of Tax
The basic rate of income tax is set in the annual budget.
Unit of measure (usually one hundredth of a percentage point) used to express movements in interest rates, foreign rates or bond yields.
The recipient of the assets subject to a Will or Trust. Essentially the nominated receiver of the benefit from the proceeds of a Will/Trust usually specified in the documentation.
Additional payment of interest if defined conditions are met, typically if an investment is held for a certain term or if withdrawals are kept under a certain limit.
Building Societies Association.The Trade Association representing interests of member societies, the number of which are reducing as societies convert to banks.
BSC - Building Societies Commission
Watchdog or regulatory organisation, answerable to the Treasury, that ensures Building Societies comply with the Building Society Act.
Buy to Let
A term used to describe the purchase of a residential property for the sole purpose of letting the property to a tenant. While some lenders will not provide mortgage finance for this purpose a number do specialise in this niche area of the market. The details of these lenders and the terms on which they will grant a mortgage can be found in the Buy to Let section of the moneynet site.
Amount of money invested, not including interest earned that may have been added to it. In relation to a company can also mean its total net worth or equity.
Capital and Interest Mortgage
(see Repayment Mortgage)
Increase in the value of a capital asset when it is sold or transferred, compared to its initial worth. Inflation can affect the 'real' capital gain. Capital loss is the opposite.
Normally refers to a remortgage when additional funds are taken over and above the amount required to repay the existing mortgage debt which is then used for personal finance purposes.
A capped rate is a mixture between a fixed rate and a variable rate. The interest rate is guaranteed not to rise above a set level within the capped rate period but if the normal variable mortgage rate is below the capped rate then the variable rate is charged. This gives the 'best of both worlds' as the interest rate can fall but will not rise above the capped rate. However, the level at which the cap is fixed is usually higher than for a fixed rate mortgage for a comparable period of time. The lender will normally impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties ).
CAR - Compounded Annual Rate
The annual rate of interest that will be earned if interest is credited to an account monthly, quarterly or bi-annually and allowed to remain on the account for that year. The rate will therefore be higher then the quoted standard rate and will enable comparisons with other accounts quoting annual rates.
This is the arrangement whereby a cash sum of money is repaid to the borrower at the start of the mortgage. The amount of the cash back will vary considerably from lender to lender with the highest amounts being paid where the borrower is willing to forgo any fixed or discounted rate offers and pay the normal variable mortgage rate. Cash back deals are also available in conjunction with some fixed or discounted rates but the amount of the cash back will normally be reduced in these circumstances. If a large cash back is being considered then it could, in some circumstances, be liable to Capital Gains Tax (refer to the lender, your accountant or local tax office for clarification ). The lender will normally impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties).
Plastic cards used for withdrawing cash from ATMs, or hole in the wall machines, with a personal identification number (PIN) to confirm validity of the user. These cards are commonly combined with credit or debit cards
This refers to the group of lenders, other than high street banks and building societies, who operate without a branch network, normally from one location.
Enables purchases and spending similar to a credit card but the debt has to be settled in full each month.
Member bank of a national cheque clearing system.
Property or securities pledged to secure a loan, sometimes referred to as the 'security' for a loan.
Remuneration for work done as an agent or broker, paid by the product provider.
This refers to insurance products which some lenders will impose as a condition of their mortgage offer. This could mean that the lender insists that accident, sickness and unemployment cover is taken out or that combined buildings and contents insurance is taken. If looking for a fixed or discounted product then these conditions should especially be watched for.
Consumer Price Index
Monthly index that measures the changes in a cost of a basket of consumer essentials and acts as a major indicator of a nation's inflation rate.
County Court Judgement (CCJ)
A judgement for debt recorded at a County Court. These judgements will be shown when the lender carries out a credit search. If the debt has been repaid, subsequent to the judgement being recorded, then the entry will be marked 'satisfied'. The appearance of CCJ's on the credit register will greatly reduce mortgage options and nearly all lenders will insist that they are satisfied before considering an application. Even with the judgement(s) satisfied few lenders are prepared to consider lending other than for the most minor judgements.
Insurance to cover the monthly payments on a loan should the borrower not be able to meet the commitment due to sickness or unemployment. Also known as payment protection.
Overall credit worthiness of a borrower. For companies there are rating agencies that give ratings described in terms of 'AAA' or 'triple A'.
Credit Reference Agency
Collates information from a variety of sources on the borrowing habits of adults in the UK. This information, such as details of credit agreements, payment records, court judgements etc is supplied to lenders who use it in their credit scoring or underwriting systems. Details of personal records can be obtained by writing to the agency and enclosing a fee, normally of £2-£3.
A system used to calculate the risk of granting a loan or the probability that it will be repaid. Each lender sets their own criteria based on historical evidence of good and bad customer characteristics. Some lenders will use this as an indication of the potential borrowers credit worthiness whilst others may rely on it completely so that a loan application may be accepted or rejected depending on the score.
Another name for an instant access account offering banking facilities such as cheque book, cash card, guarantee card and automated payments (standing orders, direct debits etc).
Moving an outstanding debt, or amount owing, from one credit institution to another.
Usually a depressive slowdown in the rise or fall in prices and accompanied by a decline in economic output and a rise in unemployment.
The lender agrees to give a fixed discount off the normal variable rate for a guaranteed period of time. The discounted rate will move up and down with the normal variable rate but the payment rate will retain the agreed differential below the variable rate for the agreed period of time. If a discounted rate is taken the lender will normally impose early redemption penalties if the mortgage is repaid within the first few years (see Redemption Penalties ).
An interest only mortgage supported by an endowment policy. During the term of the mortgage only interest on the mortgage is paid to the lender. At the same time premiums are paid into an endowment policy which is designed to mature at the end of the mortgage term. The proceeds of the endowment policy are designed to repay the mortgage debt, although with a low cost endowment policy it is not guaranteed that the proceeds will be sufficient to repay the debt. In addition to providing the investment to repay the mortgage debt the endowment policy will also include life assurance which will repay the mortgage debt in the event of the death of the policyholder within the policy term.
Interest rate that increases during the term of the account, on defined dates and by agreed amounts.
This term is used by lenders to define all other finance commitments apart from the existing mortgage. This will take into account such items as bank loans, HP, credit cards, maintenance payments(to ex-spouse) etc. Most lenders will take these items into account when assessing how much they are prepared to lend and will usually deduct 12 months' payments from gross annual income before applying their normal income multipliers.
First Time Buyers (FTB or FTP)
Lenders differ in their definition of a First Time Buyer. Some lenders will include in this someone who has owned a property before but has no property to sell (i.e. may be renting temporarily after selling) and other lenders will include joint borrowers where just one party is a FTB. Other lenders will take a more literal definition and only include someone who has never owned a property before.
Fixed Interest Rate
The account holder receives a pre-determined and unchanging rate of interest, usually on a bond or term account, giving the investor a known return for his capital deposit. The rate will not change even if general base rates change.
The lender will fix the interest rate that they charge at a set level for a fixed period of time. There are normally a whole range of fixed rate products available from different lenders and these vary in terms from very short periods (3 - 6 months) up to the whole 25 year mortgage term. The lender will normally charge early redemption penalties if the mortgage is redeemed within the fixed rate period and often beyond the initial period (See Redemption Penalties ).
This is a term that describes a number of new mortgage schemes and is based on the fact that some of these lenders calculate the interest on the mortgage on a daily - rather than annual basis. This offers the lenders the opportunity to be more flexible with the managing of an account than would be the case otherwise. That said, there is a wide range of lenders advertising that they are flexible in outlook. It will range from the top of the scale to lenders who offer bank accounts, credit cards and full management of the finances via one account which includes the mortgage loan, or lenders that allow payment holidays, or an ability to overpay each month to either build up a fund to draw on at a later stage or to help redeem the mortgage early. At the lower end of the scale lenders will allow a partial redemption of a fixed rate - say 10% each year - without penalty.
Freehold (NOT SCOTLAND)
This describes the tenure of a property where ownership of the property and land is held indefinitely. This compares with leasehold property where the property is held for a limited period of time.
This is an additional loan made by the existing mortgage lender and secured by the first charge on the property. The Further Advance can be used for a variety of purposes (subject to the lenders approval) such as home improvement, purchase of freehold or personal purposes, such as debt consolidation.
The contractual rate of interest without or before the deduction of any income tax liability. If interest is received gross the investor takes the responsibility for discharging any tax liability due to the Inland Revenue. However the interest will generally be paid net unless a registration form is completed to comply with Inland Revenue regulations.
Gross Monthly Payment
This is the monthly mortgage payment before allowance is made for MIRAS tax relief (see MIRAS ). This figure will be shown on the mortgage offer, but providing the borrower is eligible for MIRAS tax relief then the lower net payment will represent the actual payment to be made.
A card used in conjunction with a cheque book that guarantees the payment to the payee, up to the amount of the card (usually £50, £100 or £250).
A guarantor is a person other than the borrower who guarantees the mortgage repayments. A Guarantor can sometimes be used to support a borrower who has insufficient income to qualify for a mortgage in their own right. The Guarantor will normally need to have sufficient income to support the new mortgage in its entirety after taking into account any existing mortgage and other commitments they have personally. The Guarantor becomes responsible for the whole mortgage repayment if the borrower defaults.
Higher Rate of Tax
Currently the highest rate of UK income tax.
Home Buyers Report
A type of survey report which is more detailed than a Mortgage Valuation but not as in depth as a Full Structural Survey. A Home Buyers Report is often carried out by the proposed lenders surveyor and the report can then be used for the lender to replace the Mortgage Valuation in addition to acting as a detailed report for the borrower. A Home Buyers report may not be suitable for certain types of property where a Structural Survey may be more relevant. If in doubt talk to the surveyor you propose to use.
A rate of interest charged for an initial period to attract business to the provider. Typically this might be a lower APR on credit cards for the first six months if existing balances are transferred to them. After the incentive period the rates will revert to the normal rates prevailing at that time.
Date on which the fixed interest or special conditions on an account end, after which the account normally reverts to an ordinary instant access account.
See Investment limit.
This indicates the minimum initial investment acceptable to the account. Some accounts may allow the balance to fall below this once it is operational but you may find the interest rate is appreciably lower.
Stands for Mortgage Interest Relief at Source. This is the way in which tax relief was allowed on mortgage payments. The withdrawal of Miras was announced in the budget, 9th March 1999, by the Chancellor and took effect from April 2000.
Mortgage Indemnity Guarantee (MIG)
This is known under many different names which include the following; Indemnity Premium, Insurance Guarantee Premium, Additional Security Fee, Mortgage Guarantee premium, Mortgage Indemnity Premium amongst others. This is a fee that is payable if a 'high percentage loan to value' is required. The MIG fee is used by the lender to purchase insurance to cover them in the event that you default on the mortgage and they make a loss on possession and resale of the property. The policy has no benefit to the borrower and offers no protection - indeed if your property is repossessed and the lender claims on the Mortgage Indemnity Insurance then the insurance company that has paid out the claim to the mortgage lender can still pursue you, the borrower, for repayment of that amount.
This is the number of years over which the mortgage is arranged. If a capital and interest mortgage is being considered then it is worth looking at shorter terms than the traditional 25 year mortgage as considerable interest savings can be made by reducing the mortgage term by even a couple of years.
This is the most basic form of survey and is the minimum required by lenders in order to ascertain the suitability of the property as security for their loan. Although the borrower will normally receive a copy of this report it should not be relied upon as a comprehensive report on the condition of the property. A more detailed report (either a Home Buyers Report or Structural Survey) should be commissioned when considering the purchase of a property.
An organisation owned by its members and run for their benefit e.g. building societies, friendly societies and some life insurance companies.
The person responsible for settling any dispute or complaint that is referred to them or escalates to them because the companies own internal procedures have not resolved the problem. There are numerous ombudsmen covering the various institutions: The Financial Ombudsman Service (incorporating the Building Society Ombudsman and the Banking Ombudsman) 0845 0801800 The Pensions Ombudsman 020 7834 9144 (for occupational pension schemes), the Parlimentary Ombudsman 020 7217 4163 (for complaints regarding National Savings).
Where interest earned is credited to an account only on the maturity date e.g. on the second anniversary of a two year bond, and not in between.
This describes a mortgage where only part of it is covered by an endowment policy. The balance could be arranged on an interest only basis or more commonly on a capital and interest basis.
(see Credit Insurance)
Loss of interest or charge incurred on partial withdrawal or closure of account where account conditions allow.
This is an interest only mortgage which is supported by a Personal Pension Plan. Interest only is paid to the lender and in addition premiums are paid into a Personal Pension Plan. On retirement a portion of the personal pension fund can be taken as a tax free cash sum and it is this cash lump sum (or a part of it) which is used to repay the mortgage debt. The disadvantage of this type of mortgage is that the mortgage term must run through to anticipated retirement age (for the younger borrower this could exceed 25 years) and part of the retirement fund is used to repay the mortgage debt. The advantage is that the pension premiums attract tax relief at the borrowers highest rate.
This is an interest only mortgage which is supported by a Personal Equity Plan. Interest only is paid to the lender and at the same time contributions are made to a Pep with the aim that the mortgage debt will be repaid on or before the end of the mortgage term from the proceeds of the Pep. Pep's were withdrawn on 5th April 1999 and were replaced by the Individual Saving Account. Existing Pep plans can remain in force and will remain both income tax and capital gains tax free.
Personal Equity Plans. These offered the private investor the most tax efficient way of investing in stock market related plans, but ended on 5 April 1999 to be replaced by ISAs. Any balance held in these plans still attracts the same tax benefits, being free of any income tax or capital gains tax liability.
Permanent Health Insurance (PHI)
This is a type of insurance which will pay a proportion of normal income in the event that the policyholder is unable to work due to accident, sickness or disability. These policies are normally used to replace a percentage of full income rather than just the mortgage repayment but the level of cover can be selected up to certain maximum levels. This type of cover should not be confused with ASU/ASR policies which will normally only cover the mortgage payment for a limited period of time. PHI policies can be arranged to pay income until a return to work or normal retirement age.
The amount of income that can be earned before the individual becomes liable to income tax. Personal allowances are set each year by the Chancellor in his annual budget.
Personal Pension Plan
Personal Pension Plans are designed to cater for pension planning for the self employed or employed in non-pensionable employment. Contributions made to a personal pension plan are exempt from tax at the persons highest rate of tax and the retirement age may be selected at any time from age 50 to age 75. Up to 25% of the pension fund on retirement may be taken as a tax free cash sum and it is this tax free sum which is used to repay the mortgage debt in the case of a Pension Mortgage.
PLC - Public Limited Company
The standard form of public company in the UK that qualifies for listings on the stock market. A public limited company is owned by its shareholders.
This describes the ability to move a particular mortgage product from one property to another in the event of a property move. This is particularly important if a fixed, capped, cash back or discounted product is taken where early redemption penalties are charged. If the product is not 'portable' then a house move would involve the payment of early redemption penalties even if another mortgage was taken with the same lender. A portable mortgage means that the same scheme is transferred to the new mortgage for the remainder of the original term e.g. a 5 year fixed rate is taken which has redemption penalties within the first five years. If the borrower decides to move after two years then the same five year rate will apply to the new mortgage for the balance of the remaining three years. If the original product was not portable, however, then redemption penalties would be paid on redemption of the existing mortgage and a new product would have to be taken for the new mortgage.
An account where any withdrawals or investments are made via the post. The bank or building society normally supply pre-paid envelopes for this and some may offer additional facilities to enable instructions to be given via the telephone or fax.
Authorisation of a person or legal entity to represent or if necessary act and vote on behalf of another.
Real interest rate
The actual amount of increase in the purchasing power of your investment. It is equivalent to the quoted gross rate of interest less any personal income tax liability and less the effects of inflation on your capital.
An additional charge made by the lender if the mortgage is repaid within a pre-agreed period of time. These have become increasingly common with the growth in fixed rate and heavily discounted products. They are generally imposed to stop borrowers hopping from one lender to another simply to take advantage of the latest heavy discount or cheap fixed rate. Normally expressed as a number of months interest within a set period of years i.e. 6 months interest if redeemed within the first seven years but may also be expressed as a percentage of the mortgage debt i.e. 5% of the mortgage if redeemed within the first seven years. Careful attention should be paid to these penalties as they vary considerably from lender to lender and the lower and shorter the penalty the more attractive the deal.
A charge made for paying off a loan, or debt balance, before an agreed date.
This refers mainly to the smaller local Building Societies who restrict their lending to within certain regional locations. This could also be applied to a larger number of lenders who will not lend in Scotland or Northern Ireland and if you are looking for a mortgage in either of these areas you should check at an early stage that the lender will lend in these areas.
This is the process by which a mortgage on a property is moved from one lender to another. The new mortgage is used to repay the existing lender and at the same time additional funds may be raised for other purposes. Remortgaging has become an increasingly popular way to take advantage of the competitive deals offered by lenders to attract new business. If a remortgage is being considered then careful attention should be paid to the costs associated with arranging the remortgage as well as the savings to be made on the monthly repayment ( the costs can sometimes erode any savings to be made ). The remortgage calculator on this site highlights costs to take into account when considering a remortgage. A check should also be made with the existing lender to ensure that there are no early redemption charges.
Also called an Annuity mortgage or Capital and Interest mortgage. With this type of mortgage the monthly repayment includes an element of the capital sum borrowed in addition to the interest charged. In the early years of the mortgage the majority of the monthly repayment consists of interest with only a small part repaying the capital. However, as the debt gradually reduces the element of capital increases and the interest element reduces, so although the monthly repayment stays the same (assuming interest rate remain unaltered) the debt starts to reduce more quickly as the term of the mortgage progresses. On a 25 year term mortgage it would not be unusual to still owe over 50% of the original debt after the first 15 years. Providing the correct monthly repayments are made on their due dates this mortgage will guarantee to repay the total mortgage debt at the end of the mortgage term.
See Buy to Let.
Retail Price Index
Measurement of the rate at which prices are rising i.e. inflation, calculated monthly by taking a sample of typical household goods and services.
This relates to monies withheld by lenders until certain mortgage conditions are met. This will normally relate to repairs or improvements to the property that the lender is insisting on.
Tax system introduced in April 1996 where certain individuals are responsible for working out their own tax liability and reporting to the Inland Revenue. Those affected are typically the self-employed, partners, pensioners and company directors.
Several lenders will allow borrowers to self certify their income and no further checks on income are made. This type of scheme is useful to the self employed who may not have accounts available or any other person who has difficulty in proving their earned income. The lender will normally make checks on previous credit history and will require a clear credit search in addition to a good previous lenders reference.
This will usually cover anyone who is not paid under PAYE. In addition, for mortgage purposes, most lenders will class controlling directors as self employed or directors with more than a 20% shareholding. If this applies then the lender is likely to ask to see company accounts and to write to the companies external accountant for proof of income.
A new generation of plastic cards similar to debit cards but which will hold more information. The card will contain a computer chip and will be used to create a cashless payment system with enhanced security. The cards are currently being piloted in certain cities around the world .
This is a tax which is levied on the purchase of property. The tax is paid by purchasers and is currently levied at the following rates, which were announced on March 22nd, 2000 by the Chancellor in his budget speech: 1% of property value £60000 - £250000, 3% of property value £250001 - £500000 and 4% of property value £500001 and above. The appropriate rate is paid on the whole purchase price and not just the excess applying to that band i.e. a purchase price of £350000 will attract £10500 stamp duty, being 3% of £350000. Since 30th November 2001, some disadvantaged areas of the UK became liable to stamp duty exemption. To see if the property you are purchasing is eligible for exemption, or for more information, call the Stamp Taxes Helpline on 0845 603 0135 or visit www.inlandrevenue.gov.uk/so/disadvantaged.htm
This is the most detailed type of survey report normally undertaken in connection with a House Purchase. If a Structural survey is opted for then the lender will also need to have a mortgage valuation carried out for their own purposes and the borrower will be responsible for both fees. An alternative may be a Home Buyers Report which will cover both the borrower and the lender but advice should be taken from a qualified surveyor who will be able to advise on individual properties and circumstances.